Why the government should rethink the mortgage stress test

Why the government should rethink the mortgage stress test

Haider-Moranis Bulletin: Mortgage default rates are sensitive to job losses, not interest rate changes —stress tests might not be much of a safeguard.

A new report from the Mortgage Professionals Canada contends the stress tests have exacerbated the slowdown in the housing market.Sean Kilpatrick/The Canadian Press

A series of regulatory changes, which included interest rate hikes, taxes on foreign homebuyers and stress tests, have contributed to a slowdown in housing markets in Canada.

That’s the conclusion of a new report from the Mortgage Professionals Canada (MPC) that questions whether government interventions in the mortgage market have been too intrusive and could lead to further unintended economic outcomes.

Specifically, the MPC, an industry group that represents mortgage and service providers, contends the stress tests have relied on “the wrong interest rate,” and thereby exacerbated the slowdown.

The report questions the fundamental premise of the stress tests, which were intended to determine the debt worthiness of borrowers in case interest rates were to rise in the future. Mortgage defaults, the MPC argues, are influenced more by increases in job losses and not necessarily by changes in interest rates.

Housing sales in 2018 declined by 11 per cent, but the amount of outstanding mortgage credit at the end of 2018 was estimated to be a staggering $1.55 trillion.

While the decline in sales has adversely impacted mortgage brokerages and lenders, the MPC report suggests the effect on the larger economy could include many unintended consequences.

The stress tests require borrowers, both first-time homebuyers and those applying for in-transfer of existing mortgages, to qualify at a rate two percentage points higher than the contracted rate. However, the report argues the threshold is unduly high and ignores the fact that in five years, a borrower’s income would be higher and they would have paid a significant amount towards the principal.